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| AT THE CLOSE Starting To Trade For A LivingEver thought of trading for a living and didn’t know where to start?
Retail account trading The days of broker assistance is pretty much over, morphing into individual online access. The investor will likely look more to financial advisors for advice rather than a stockbroker. For active trading, the novice may want to look for something like the ability to short stocks easily. The world of buy & hold has pretty much gone the way of telephone service from a broker. You’ll want to be able to receive interest on your short stock sale monies. You’ll also need to qualify as a pattern daytrader (Pdt) if you plan on making a few trades in the same stocks each week. This requires a minimum balance of $25,000, and allows for 4:1 margin vs. the standard 2:1. Be sure you’re using capital, not just overleveraging yourself with additional shares and additional risk. It’s hard to make an actual living with accounts like these. What kinds of groups are out there for traders? Retail type trading groups Other methods abound of circumventing Pdt rules. Some groups claim that you will be trading with “the firm’s money,” thus placing you into a quasi-employee status. Their deal is to charge you $5,000 to $15,000 or more as a training fee. Then they’ll let you trade in very small increments until you lose a bit and then they’ll let you go, thus keeping most of that fee. Caveat emptor, indeed. “True prop” trading firms Zero capital–required firms If the trader does make money, then the money will accumulate in his or her trading account, with only minimal withdrawals available. So in effect, the trader has capital at risk after a couple of months. A good way to analyze the deal is to assume you are making money right away. Say you’re making $12,000 per month, with $2,000 going to the firm for commissions. That leaves $10,000 to divide 50/50. So you make $5,000, while the firm makes another $5,000. If this were to go on for a few months, you would have given away a great portion of your earnings. But if you don’t make money, you’ll soon be let go. There is nothing inherently wrong in this model as long as the trader goes in with his eyes wide open. Professional trading firms Back when my brother Bob and I started trading in the 1970s, we had to buy seats on the various exchanges (which was, yes, costly), but after doing so, we found out something unique about this business. After putting up $25,000 or so with our clearing firm, we were able to use their money for executing our trading strategies, while keeping 100% of our trading profits. All the clearing firm asked was that we pay for execution and clearing of our trades, as opposed to leverage — we were able to use capital to engage in solid, working strategies. We traded stocks, options, and futures back in those days. Over the last decade or so, we have found that our focus has shifted to equities. This business arrangement — because we can never forget that trading is a business — worked so well that in 1992 we duplicated the model off the trading floor. Our traders don’t need to buy exchange seats. They put up around $20,000 or so and use $1 million or more of our capital (under tight risk controls). We offer low-cost training for new people and have continued interaction with various mentoring, teams, and subgroups so that even our most remote trader feels part of the team, day in and day out. Do your homework Suggested reading | |||||||||||||||
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